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4/23/2016

Volkswagen’s “Clean Diesels”

Volkswagen has advertised its TDI Clean Diesel engines for
years as having fewer emissions and better fuel economy compared to gas
engines. Many people purchased Volkswagens with the TDI Clean Diesel engine
because of the company’s advertisements. Recently the truth about these “clean
diesels” was revealed, and some TDI owners and the United States government are not
happy.

In September of 2015, Volkswagen’s “clean diesel” scandal
was exposed when the United States Environmental Protection Agency (EPA) issued
the automaker a notice of violation of the Clean Air Act. The EPA found that
newer models of the TDI engines were equipped with software to cheat emission
testing. This software made it so the emission-controlling equipment in the TDI
Clean Diesel engines only worked when it sensed the car was being tested for
emissions. This equipment was deactivated during normal driving conditions. The
software resulted in “clean diesels” emitting almost 40 times the amount of
nitrogen oxide (NOx) allowed by the Clean Air Act. These “clean diesels” have
heavily polluted the air with harmful NOx emissions, which can cause
respiratory diseases such as emphysema, bronchitis, and asthma.

The “clean diesel” scandal is a prime example of negative
externalities. Negative externalities are costs suffered by a third party who
is not involved in the production or consumption of a good. In this case, the
TDI Clean Diesel engines are the good that is being produced by Volkswagen and
consumed by those individuals driving vehicles with those engines. The third party
is those individuals who inhale the air polluted with NOx emissions. The costs
suffered by the third party include, but are not limited to, respiratory
illnesses, hospitalizations, and premature deaths associated with the inhalation
of NOx emissions.

3 comments:

I'm not sure the Volkswagen scandal is a negative externality. Certainly, pollution is a negative externality, and the pollution emitted by TDI Clean Diesel owners would be one too.

I do think there's some interesting game theory going on here. The regulators are playing like there is no game at all: manufacturers always follow the same strategy, and the regulators either test or they don't. But Volkswagen took a different route, and turned this into a coordination game. They had two possible strategies, reduce emissions or not, and matched them up to the testing environment to produce two Nash equilibria — one with low emissions during a test, and one with high emissions (and better performance) when no test was being run.

Interestingly, Volkswagen, which sold similar cars in America and Europe, is taking the position that none of this was illegal under the laws in Europe. In contrast, they quickly admitted that U.S. laws did stipulate that you could not do this. So there's an aspect to this in which the American regulators did their job better.

Another possible economic take on this issue is the tradeoffs involved in emissions control. Controlling CO2 emissions requires higher running engine temperatures. But this also creates more NOx emissions. Firms are typically required to reduce both, in spite of a tradeoff that's physical rather than economic.

FWIW: Is it just me, or should someone have been suspicious of the idea of a clean diesel long before this?

My first car was a Jetta TDI and I loved it, with the car getting 50+ miles per gallon how could I not? My question is, if you currently own one of the cars in question what are you supposed to do? If you take it to the dealer they will update the software and you will meet emissions requirements, however this is at the cost of your gas mileage. The opposite is true, if you don’t take it to the dealer then you won’t pass emissions requirements but your gas mileage will remain excellent, unfortunately at this point the car won’t be legal to drive. I guess the only option for TDI owners would be for them to move to a county or state that doesn’t require emissions.

The big picture that economists attempt to draw from situations like this, is whether or not there's something like "conservation of value" in economics and finance.

The idea is akin to the conservation of energy in physic's three laws of thermodynamics. Those are so basic that high school students often find them silly when they are first explained, but a lot of good physics has been developed through the centuries by paying attention to them.

Honestly, we have no idea if something like conservation of value exists in economics. If it does, it's more of an axiom we assert rather than a theorem we prove My money is that it does not. Having said that, it can be a useful way to think about issues like this. Of course, we might not like the answers we get, but here goes.

Start off by thinking that a Volkswagen has some value, both to the owner and to society. Take that as a given. If it has functioning pollution control software, then that is part of its value. If the company has faked that pollution control, then the car is more valuable to the owner than it should be, and less valuable to society as a whole. Under conservation of value, the value lost by society was transferred to the owner, or possibly split between the owner and Volkswagen (since they get a positive reputation for their vehicles). If this scheme gets found out, and the problem gets fixed, then the value of the car to all parties should return to what it should have been.

I'm not claiming that logic is perfect, but it is a step in the right direction.

But, if that's the case, it implies the politically and socially unpopular conclusion that the car owner hasn't been hurt. That makes their situation kind of like receiving stolen property, innocently, then using it for a while and then having to give it back. It was fun while it lasted.

Society hasn't been harmed either.

But Volkswagen tried, and almost succeeded in transferring value from society to themselves that was not deserved. That's a reason for a really tough punishment.